Confused between being debt-free early and stretching your budget for a new car? Choosing between a short-term loan and a long-term loan has its set of advantages and disadvantages. Do you want to finish the auto loan quickly? Should you opt for a higher number of months? Let's understand how the length of your auto loan affects your financial situation. Make a well-thought decision that you will not regret later.
One of the important things that will define your car buying journey will be the length of your auto loan. An auto loan term is the time period in which you will repay the loan. Short-term auto loans vary between 12 to 60 months and long-term auto loans range between 72 to 84 months or above. Before you decide on the period of the loan, understand the implications of making a decision.
Which Auto Loan Term Is More Advantageous to You?
1) Short-Term Auto Loan
Advantages: One of the biggest advantages of choosing a short-term auto loan is that the loan is paid off earlier as compared to a longer term. It will make you less debt-ridden tomorrow. It attracts lower interest rates which means you are eventually paying less towards obtaining an auto loan. A short-term auto loan will also decrease your chances of being upside down and help you to build your equity at a faster pace compared to the other options.
Disadvantages: It has a high monthly payment. A certain part of your monthly income will be tied up towards making payments for the auto loan. It can be comfortable only if you have put a good amount of money down. Down payment can help you to attain a successful completion of a short-term auto loan.
2) Long-Term Auto Loan
Advantages: As a long-term auto loan is stretched for more than 5 years, the monthly payment is relatively lower compared to a loan that can be paid off quickly. Another advantage of choosing it is the flexibility to make payments, i.e., you can refinance your auto loan and increase the monthly payment amount to pay off your auto loan early.
Disadvantages: A long-term auto loan is not ideal as you risk being upside down for a long time. Usually refinancing is possible when your car does not have any negative equity, which is rare when you spend several years making low payments. Therefore, it becomes a task to refinance, sell or trade in a car with a long-term auto loan. Also, once your warranty runs out, it can become difficult to make expensive repairs to the car. Additionally, it will attract high interest rates, thereby increasing the cost of the auto loan.
Being Far Sighted: How do you choose an Auto Loan?
Comparing the points above, a long-term auto loan is suitable for someone who can risk a high interest rate in order to receive flexible payment options. Short-term auto loans are the ideal option only if you can manage the payments. Early repayment of the loan means that you will require a good down payment and the ability to make big payments every month. A loan period spread over several months makes sense for you if you want to make payments that are easy on your wallet. The auto loan option that you choose depends on your current financial circumstances and your ability to successfully make payments in the future.
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